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Cost Accounting

Cost accounting is a managerial accounting method that assesses both variable and fixed costs to determine a company's total production costs. It categorizes costs into fixed, variable, operating, direct, and indirect, and aims to ascertain product costs, analyze operations, and control wastage. The main objectives include providing data for pricing, profitability analysis, and effective management planning.

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Meredith Chelsea
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24 views5 pages

Cost Accounting

Cost accounting is a managerial accounting method that assesses both variable and fixed costs to determine a company's total production costs. It categorizes costs into fixed, variable, operating, direct, and indirect, and aims to ascertain product costs, analyze operations, and control wastage. The main objectives include providing data for pricing, profitability analysis, and effective management planning.

Uploaded by

Meredith Chelsea
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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What Is Cost Accounting?

Cost accounting is a form of managerial accounting that aims to capture a


company's total cost of production by assessing the variable costs of each step
of production as well as fixed costs, such as a lease expense.

Types of Costs

 Fixed costs are costs that don't vary depending on the level of
production. These are usually things like the mortgage or lease payment
on a building or a piece of equipment that is depreciated at a fixed
monthly rate. An increase or decrease in production levels would cause
no change in these costs.
 Variable costs are costs tied to a company's level of production. For
example, a floral shop ramping up its floral arrangement inventory for
Valentine's Day will incur higher costs when it purchases an increased
number of flowers from the local nursery or garden center.
 Operating costs are costs associated with the day-to-day operations of a
business. These costs can be either fixed or variable depending on the
unique situation.
 Direct costs are costs specifically related to producing a product. If a
coffee roaster spends five hours roasting coffee, the direct costs of the
finished product include the labor hours of the roaster and the cost of the
coffee beans.
 Indirect costs are costs that cannot be directly linked to a product. In the
coffee roaster example, the energy cost to heat the roaster would be
indirect because it is inexact and difficult to trace to individual products.

Objectives of Cost Accounting

The objective of the cost accounting is to determine the methods by which


expenditure on materials, wages and overhead are recorded, classified and
allocated. This is necessary so that the

cost of products and services may be accurately ascertained. Thus, the following
are the main objectives of cost accounting:

1. Ascertainment of the cost per unit of the different products that a business
concern manufacturers.
2. To correctly analyze the cost of both the process and operations.
3. Disclosure of sources for wastage of material, time, expenses or in the use of
the equipment and the preparation of reports which may be necessary to
control such wastage.
4. Provide requisite data and help in fixing the price of products manufactured
or services rendered.
5. Determination of the profitability of each of the products and help
management in the maximization of these profits.
6. Exercise effective control of stocks of raw material, work-in-progress,
consumable stores, and finished goods so as to minimize the capital invested
in them.
7. Present and interpret data for management planning, decision-making, and
control.
8. Help in the preparation of budgets and implementation of budgetary control.
9. Aid management in the formulation and implementation of incentive bonus
plans on the basis of productivity and cost savings.
10.Organization of cost reduction programmes with the help of different
departmental managers.
11.To provide specialized services for cost audit in order to prevent errors and
frauds.
12.To facilitate prompt and reliable information to management.
13.Determination of costing profit or loss by linking the revenues to costs of
those products or services by selling which the revenues have arisen

The elements of cost accounting

1. Materials
2. Labour,
3. Expenses and
4. Overheads

Materials cost is of two types, viz:

(i) Direct materials cost, and


(ii) Indirect materials cost.
(i) Direct Materials Cost:
Direct material cost is “The cost of materials entering into and becoming
constituent elements of a product or saleable service”. Thus, materials which
can be identified with units of output or service are known as direct materials.
Cotton used in production of cloth, leather used in the case of production of
leather goods and lime in the production of chalk, etc., are the examples of
direct materials. Any materials purchased and used for a specific job are also
direct materials.

(ii) Indirect Materials:


“Materials used for the product other than the direct materials are called indirect
materials. In other words, materials cost which cannot be identified with a
specific product, job, process is known as indirect material cost.
Small tools, stationery used in works, office stationery, advertising posters, and
materials used in maintenance of plant and machinery are a few examples of
indirect materials.

Labour cost is also divided into direct and indirect portions:


(i) Direct Labour Cost:
It is also called ‘Direct-wages’. Direct labour cost is the cost of labour directly
engaged in production operations. E.g., workmen engaged in assembling parts,
carpenters engaged in furniture making, etc.
(ii) Indirect Labour Cost:
Indirect labour cost is the remuneration paid for labour engaged to help the
production operations, e.g., inspectors, watchmen, sweepers, store keepers, etc.
The remuneration paid to these persons cannot be traced to a job, process or
production order. The labour costs of idle time, overtime, holidays, etc., are also
taken as indirect costs. Similarly, clerical and managerial staff, salesmen,
distribution employees are also included in the orbit of ‘indirect labour’.

Expenses are of two types:


(i) Direct expenses, and
(ii) Indirect expenses.

(i) Direct Expenses:


These are the expenses which can be directly identified with a unit of output,
job, process or operation. They are specifically incurred for a job, or unit or
process and in no way they are connected with other jobs or processes. The
direct expenses are also known as chargeable expenses.

(ii) Indirect Expenses:


Indirect expenses are expenses other than indirect material and indirect labour,
which cannot be directly identified with units of output, job, process or
operation. These expenses are incurred commonly for jobs and processes.

Direct and Indirect Costs:

Direct Cost or Prime Cost:


The aggregate of all the direct costs i.e., Direct Materials, Direct Labour or
wages and Direct expenses is termed as- ‘Prime Cost’ or ‘Direct cost’. Thus
prime cost or direct cost is the sum of all the elements of costs which can be
specifically identified with particular products or jobs and allocated to such
output.

Indirect Cost or ‘Overhead’ or ‘On Cost’ or ‘Burden’: The


aggregate of all the indirect costs i.e., Indirect Material, Indirect labour and
Indirect expenses is variously termed as ‘On cost’ or ‘overhead’ or ‘Burden’.
Over heads or on cost or indirect cost cannot be identified with specific
products or jobs. So it is apportioned to the output on some reasonable basis.

Overhead:
On the basis of functions overhead is classified as:
(i) Factory overhead
(ii) Administration or office overhead, and
(iii) Selling and Distribution overhead.

(i) Factory Overhead:


This is the aggregate of indirect material, indirect wages and indirect expenses
incurred in the factory. Examples of indirect factory expenses are rent, power,
depreciation lighting and heating incurred in the factory.
(ii) Administration or Office Overhead:
All the indirect administration expenses, come under this category. Salaries of
office staff, accountants, directors’ fees, rent of office building, stationery
expenses incurred in the office lighting and bank charges, etc.,

(iii) Selling and Distribution Overhead:


This includes indirect selling and distribution expenses. Examples are salaries
of salesmen, selling commission, advertising, warehouse rent, maintenance of
delivery vans, warehouse staff expenses, warehouse lighting, etc.

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